Opinion of the Economic and Social Committee on 'The EU Economy: 1999 Review'
Date: 2000-03-30
Institutions: European Economic and Social Committee
Subjects: EU Member State, European Union, economic policy, report

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Official Journal of the European Communities

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Opinion of the Economic and Social Committee on ‘The EU Economy: 1999 Review’

(2000/C 140/12)

On 2 March 2000 the Economic and Social Committee, acting under the third paragraph of Rule 23 of
its Rules of Procedure, decided to draw up an opinion on ‘The EU Economy: 1999 Review’.

The Section for Economic and Monetary Union and Economic and Social Cohesion, which was
responsible for preparing the Committee’s work on the subject, adopted its opinion on 7 March 2000.
The rapporteur was Mr Harry Byrne.

At its 371st plenary session (meeting of 30 March 2000), the Economic and Social Committee adopted
the following opinion unanimously.

1.

Introduction

— the origins of European Union unemployment

1.1.
The Commission has launched a new publication
under the title EU Economy: 1999 Review which supersedes
the former Annual Economic Report.

1.2.
The 1999 Review serves two main purposes; firstly
to provide a report on recent and prospective economic
developments in the European Union and secondly to study
specific economic topics which are of particular importance
for economic policy — the thematic studies.

1.3.
The Committee welcomes the new publication. With
the launch of the single currency and the completion of the
single market it is becoming increasingly relevant to view the
European Union as a single economic entity and to monitor
closely any divergence within individual Member States which
might threaten the overall economic coherence of the Euro-
pean Union.

The Committee also welcomes the in-depth analysis

1.4.
provided within the thematic studies of five important areas:

— the tax-benefit systems and incentives to work

— the long-term economic and budgetary implications of

population ageing

— price level differences in the European Union

— the European equity market developments.

2. Economic Situation and Prospects

2.1. The autumn 1999 forecasts for 2000-2001

The autumn 1999 forecasts present a more promis-
2.1.1.
ing outlook for growth and employment together with con-
tinued progress towards convergence.

Main features of autumn 1999 forecasts: — EU-15 (a)

1997

1998

Autumn 1999

Difference with
Spring 1999 (b)

1999

2000

2001

1999

2000

2,5

5,5

0,8

10,6

1,7

– 2,4

70,5

2,6

9,4

1,3

9,9

1,3

– 1,5

69,6

2,1

6,0

1,2

9,2

1,2

– 1,0

68,6

3,0

6,3

1,2

8,6

1,5

– 0,6

66,3

3,0

6,8

1,1

8,0

1,6

– 0,3

63,8

0,0

2,2

0,4

0,3

1,0

0,4

– 0,4

– 0,6

0,0

0,5

0,0

0,0

0,7

– 0,7

GDP growth

Investment in equipment

Employment

Unemployment rate (c)

Inflation (d)

Government deficit (% GDP)

Government debt (% GDP)

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1997

1998

Autumn 1999

1999

2000

Current account balance (% GDP)

p.m. GDP growth EUR-11

1,4

2,3

1,0

2,7

0,5

2,1

0,4

2,9

Difference with
Spring 1999 (b)

1999

2000

– 0,4

– 0,1

– 0,5

0,2

2001

0,5

2,9

(a) Real annual percentage change unless otherwise stated.
(b) A ‘+’ (‘-’) sign means a higher (lower) positive figure or a lower (higher) negative one compared to Spring 1999. The changeover to ESA 95 implies that some

data are not totally comparable between the two forecasts.

(c) Percentage of the labour force.
(d) Harmonised index of consumer prices.
Source: European Economy, Supplement A — Economic trends, No 10/11 — October/November 1999, European Commission

2.1.2. While almost all indicators show a more favourable
picture for 1999 and 2000 compared with the spring 1999
forecasts the highlights are:

2.3. The thematic studies

— 3 % growth forecasts for 2000 and 2001

— a significant increase in investment

— a lowering in government deficits and overall debt.

2.3.1. T h e o r i g i n s o f E U u n e m p l o y m e n t

The Commission concludes that

2.3.1.1.
the high and
persistent unemployment in Europe has been the result of
the interaction of adverse supply and demand shocks with
insufficiently flexible labour market institutions and product
market regulations. It puts forward the view that overcoming
this problem will require:

2.1.3.
an improving trend albeit at a relatively modest pace.

The employment/unemployment forecasts also show

— sound macroeconomic policies

2.2. The EU Review 1999

— policies to improve the overall

functioning of

labour

markets

2.2.1.

The highlights of the review are:

— economic reforms to improve competitiveness and the

functioning of the markets for goods and services.

— the successful launch of the euro in eleven Member States

— the slowdown in late 1998/early 1999 has been reversed
with assistance from lower interest rates, moderate pay
developments and the boost to exports provided by the
depreciation of the euro

— inflation has remained under control despite the impact of

sharply increased oil prices.

2.2.2.
The Commission believes that sound economic fun-
damentals in the European Union and a brightening external
environment justify a positive view being taken of short term
economic growth. The main downside risk is of a ‘hard
landing’
in the US economy which would again interrupt
world expansion as the Asian crisis did in 1998.

2.2.3.
The Commission is broadly satisfied with the stability
and convergence programmes submitted by the Member States
as required under the Stability and Growth Pact although it
believes that some Member States should accelerate their
programmes.

2.3.2. T a x - b e n e f i t

s y s t e m s

a n d

i n c e n t i v e s

f o r w o r k a n d j o b c r e a t i o n

The Commission stresses that tax-benefit systems
2.3.2.1.
should provide real
incentives for unemployed or inactive
people to seek and take up work or training opportunities.
Against this criterion the Commission concludes that although
Member States have started to address this issue progress to
date has been inadequate.

2.3.3. T h e l o n g - t e r m e c o n o m i c a n d b u d g e t -
p o p u -

i m p l i c a t i o n s

a g e i n g

o f

a r y
l a t i o n s

This is not the first time the Commission has
2.3.3.1.
focused attention on the implications of increased health and
pensions expenditures arising from ageing population. In this
commentary it emphasises the potential impact on stability
and growth in the European Union of a potential increase of
public expenditure of approximately 7 % of GDP due to the
demographic changes.

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2.3.4. M a r k e t i n t e g r a t i o n a n d p r i c e l e v e l s

The Commission assesses the current degree of
2.3.4.1.
price level dispersion in the community in comparison to the
US level. Despite some progress in 1985-1993 there is still a
significant gap against the US figure and rather surprisingly
progress has come to a halt in the post 1993 period.

3.4.
Indeed the Committee agrees with the Commission’s
assessment that the European Union may be on the brink of a
more sustained recovery which could yield much needed
stronger growth in employment. This improved employment
outlook, however, is contingent on the maintenance of an
appropriate policy mix. There is however a real prospect that
growth could exceed the 3 % forecast.

2.3.5. K e y d e v e l o p m e n t s i n E u r o p e a n E q u i t y

M a r k e t s

2.3.5.1.
The Commission analyses the performance of
European equity markets which have underperformed the US
and Japanese markets. However, the Commission goes on to
discuss whether equity markets and particularly the US market
are over-valued at present without coming to a definitive
conclusion.

3. The Economic and Social Committee’s comments

Unemployment remains the Committee’s overriding
3.1.
concern and it has previously expressed the view that the EU
must have a medium term growth objective of at least 3,5 % if
a satisfactory reduction in unemployment is to be achieved.
Nevertheless the Committee welcomes the proposal from the
Council Presidency to target a growth rate over the medium
term of at least 3 % and hopes that this will be endorsed by
the next European Summit on ‘Employment, Economic reform
and Social cohesion — Towards a Europe of Innovation and
Knowledge’.

3.2.
The forecast reduction of unemployment to 8 % by the
end of 2001 is a welcome though modest sign of progress. In
addressing EU unemployment it should not be overlooked that
with the exception of Denmark, Luxembourg, the United
Kingdom, the Netherlands, Austria and Sweden, labour market
participation rates in most EU Member States are very low
relative to the US and Japan; this may arise because some
people do not feel it is worth while registering as job seekers
due to current high level of unemployment. On the other hand
this potential additional workforce could partly offset the
effect of population ageing in coming years.

3.3.
The Committee notes the forecasts of a 3 % growth in
GDP for both 2000 and 2001. This would represent an
encouraging recovery from the disappointing 2,1 % outturn
estimated for 1999 and in the absence of adverse external
shocks including the possibility of a stock market crash, it
does not seem unduly optimistic. Moreover, whereas the
Committee was concerned last year at the emergence of
deflationary tendencies in some countries, these tendencies are
less evident today.

3.5.
The continued progress being made in economic
convergence and the overall improvement in Member States’
deficits and overall debt are building a good platform for
recovery.

that

is important

the differing positions of

3.6.
The Committee notes that the forecasts of necessity
refer in the main to the overall euro zone or the EU as a whole.
It
individual
Member States are not overlooked when interpreting general
policy guidelines. It is also important to demonstrate the
successes achieved by certain Member States in the implemen-
tation of economic policies, so one can learn from them. The
most impressive case, in this respect, is certainly that of Ireland.
Appendix I shows the main features of this success and at the
same time constitutes an invitation to the Commission to
study this type of analysis in greater detail.

3.7.
The Committee draws attention to the fact that an
important factor inhibiting employment and output growth in
the EU, is the lack of venture capital and start-up finance from
the banking sector as compared with the US. Greater access to
such funding would impart a much needed stimulating effect
on growth especially in the high technology area to which
traditional investment criteria no longer apply.

3.8.
The more important factor, however, producing an
optimistic scenario is the launch of the single currency in
eleven Member States. This was a considerable political and
technical success. The Governments of the Member States,
business as well as consumers should be accelerating their
implementation of the euro by
preparations for the full
1 January 2002.

3.9.
Some commentators have judged the euro a compara-
tive ‘failure’ because of its depreciation against other inter-
national currencies since its launch. This, however,
is to
postulate that the launch rate was the ‘right’ rate rather than
just the market rate on the day. In practice the reduced value
of the euro would seem to have more appropriately reflected
the current cyclical phase of the participating economies,
although a further decline would cause fears of a rise in
inflation.

3.10.
Indeed the reduced value of the euro has probably
been the most significant factor in triggering the export led
recovery of the euro zone in 1999. It is to be hoped that any
recovery in the value of the euro therefore does not outpace
the recovery rate of the relevant economies or that inflationary
fears do not trigger too rapid increases in interest rates.

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3.11.
The other positive contributions from the euro come
from the stimulus to intra-community trade provided by a
trading environment freed from currency risk and the greater
transparency in pricing provided by the single currency — it
must be remembered that one of the features of the euro zone
is the strong dependence on domestic demand which accounts
for 90 % of GDP. This is an argument for a faster completion
is a welcome
of the single market. The ‘Cardiff process’
instrument for realising more flexible goods, services, capital
and labour markets. This will enhance Europe’s ability to
compete in the high technology based industries.

3.12.
If, as it is expected, unemployment continues to
decline (although there are significant differences between
Member States) it is important that appropriate steps are taken
to support workers rejoining the workforce. In any recovery
the workers who first return to employment are most likely to
be those with the highest skills level and who have been
unemployed for the shortest
time. As progress is made
subsequent tranches of workers are more likely to have been
unemployed for some time and will require more targeted
assistance to reintegrate. Member States — together with social
partners — should therefore plan ahead in terms of, for
example, skills upgrading. Training and upgrading skill levels
must be targeted at existing and likely job vacancies. It should
also be recognised that the provision of relevant skills in fact
generates the demand for those skills and would contribute to
more employment intensive growth. The Committee endorses
the Economy of innovation and knowledge called for in the
Lisbon summit.

3.13.
For the Community as a whole the performance on
inflation was very good in 1999. One should not forget,
however, that inflation deserves continuing attention and in
some Member States an emerging upward trend is already of
concern.

3.14.
The Commission study of the tax-benefit systems and
incentives for work is acknowledged by the Committee as an
important contribution to understanding what needs to be
done to ensure that lower paid workers are not caught in
unemployment and inactivity traps. Although it must be
recognised that growth is the key remedy to the lack of
available jobs provided the mismatch of skills is also addressed.

3.15.
The Commission’s findings make it clear that in most
of the Member States the tax (1) structure is not favourable for
employment, particularly in respect of the lowest paid workers,
and can be an inhibition for job creation. Very few Member
States have succeeded in lowering the total labour tax wedge.

The Commission concludes on a more positive note
3.16.
in suggesting that Member States are on their way to

intensifying efforts in this area to tackle structural unemploy-
ment. While maintaining its commitment to the European
social model, the Committee voices its strong support for
Member States’ apparent determination to move in this
direction. In this regard the Committee would urge that every
effort is made to integrate the various policy initiatives from
the Commission and in particular those associated with
economic guidelines (Art. 103) and employment guidelines
(Art. 128 of the EC Treaty).

The Commission’s comments on the long-term econ-
3.17.
omic and budgetary implications of ageing populations com-
pliment earlier communications on for example pensions (2).
It is an important issue and one with potentially significant
implications for Member States’ budgetary positions and also
one whose effects extend beyond the short-term horizons of
the 1999 Review. The Committee endorses the Commission’s
call for Member States to pursue an integrated reform process
based on labour market reforms, attainment of the Stability
and Growth Pact objective of a sound budgetary position, and
improvements in the sustainability of pension and social
security systems.

3.18.
The population ageing issue is unusual in that the
long-term projections are based not on mere estimates, but on
well established trends, i.e. the decline in the birth rate and
longer life expectancy. It is also an issue which is not unique
to Europe but affects our main competitors as well, albeit to
different degrees.

On taxation, the Committee is concerned that no
3.19.
progress has been made on average in reducing the overall tax
burden which may act as a brake on economic growth and
weaken the international competitiveness of the Member States
economies. The Committee recommends that the Commission
undertake a thematic study on the relationship between level
of taxation and growth. In addition, the examination of various
types of harmful tax competition across the Member States
needs still to be followed by action.

3.20.
The Commission highlights the need for efficient
cross-border retail payment systems for small amounts; there
are 31 clearing houses in the highly fragmented European
clearing and settlement infrastructure. The Committee believes
that urgent action needs to be taken on this issue. Otherwise
the benefits of the single currency to citizens would be
undermined. This will damage the credibility of the euro at a
time when consumer confidence in the European Union needs
to be boosted.

(1) This means direct taxes and social security contributions on

labour.

(2) See also the ESC Opinion on the ‘Communication from the
Commission — Towards a Single Market for Supplementary
Pensions — Results of the consultations on the Green Paper
on supplementary pensions in the Single Market’ OJ C 368,
20.12.1999, p. 57.

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3.21.
The Committee notes with concern that the progress-
ive price convergence in the period 1985-1993 within the EU
has stalled. This would point to some inhibitions to compe-
tition. The advent of the single currency should expose this
lack of competition, which continues to diminish the gains
that should accrue to the consumer.

Last year the Committee called on the Commission
3.22.
to present medium term scenarios to assist the macroeconomic
decision making process. The Committee still feels this is a
necessary requirement
the Global
Guidelines for the economic policy of the European Union
and the Member States.

for the preparation of

4. Conclusions

4.1.
The Committee underlines once more the importance
of the annual economic report for the preparation of the Broad
Guidelines of economic policy for the Community and the
Member States. It hopes that in future the various language
versions of the Commission Report will be available more
promptly.

4.2.
The expected growth rate of about 3 % per annum for
the EU as a whole shows that the EU is definitively recovering
from the 1998 crisis, which will result in some welcome job
creation. The modest reduction in unemployment to 8 %,
however, suggests that every effort should be made to enhance
the employment
intensity of growth, especially in those
Member States with the highest unemployment rates.

Brussels, 30 March 2000.

4.3.
The Committee notes that further progress in budget
consolidation and reduction of public debt has been made. In
the present situation of higher growth this progress could,
however, be accelerated especially by efforts in some Member
States. The Committee asks the Commission to consider the
level and quality of the Member States’ public investment
(education, transport, etc.), especially for their importance for
promoting growth.

4.4.
The Committee believes that the euro launch was a
success but feels that the creation of the single currency has
not yet yielded its full positive impact. The relatively low
exchange rate of the euro against the dollar has largely been
beneficial for Europe’s export position. However, a further
decline of this exchange rate should be avoided as oil and
other commodities are priced in dollars and rising raw material
prices may trigger a rise in inflation. The Committee hopes
that as the euro becomes more firmly established, it will be
used more widely in international pricing.

4.5.
Generally speaking the present employment perspec-
tives are good. This trend could be further enhanced by a
continued application of an appropriate policy mix based on
price stability, reasonable wage trends and budget consoli-
dation.

The Committee suggests that special consideration
4.6.
should be given to helping the weakest members of the
unemployed back into employment. This would include
targeted measures to upgrade relevant skills and a study of the
inhibiting impact of the tax-benefit system especially on the
low paid. Members States with some success in this area
should be examined to see if their policies could be successfully
replicated elsewhere.

The President

of the Economic and Social Committee

Beatrice RANGONI MACHIAVELLI

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APPENDIX

to the Opinion of the Economic and Social Committee

Ireland: An example of economic policy success

The Commission’s forecasts of autumn 1999(*) count on the continuation of a very favourable trend as regards

1)
growth and employment in Ireland:

Table 1

GDP (% p.a)

Employment (% p.a)

Unemployment rate
(% active pop.)

4,6

4,6

8,0

7,8

6,9

5,8

1,1

1,9

4,0

4,2

3,2

2,4

15,5

14,5

7,7

6,4

5,5

4,9

∅1986-1990

∅1991-1995

∅1996-2001

1999

2000

2001

More recent information suggests that results could be even better still.

This development has allowed Ireland to make up a lot of ground as regards GDP per capita (in purchasing-

2)
power parities EUR 15 = 100) as well as employment.

Table 2

GDP/head (pps) EUR 15 = 100

IRL

62,6

61,2

65,5

66,8

73,3

92,1

93,0

101,7

107,0

111,5

115,0

UK

121,6

102,8

95,7

98,9

99,5

95,4

98,1

101,5

101,8

102,0

102,7

D

121,1

115,1

115,5

115,6

114,2

109,8

109,6

107,9

107,6

107,1

106,8

1960

1970

1980

1985

1990

1995

1996

1997

1998

1999

2000

(*) The figures in this appendix concerning the years 1999, 2000 and 2001 correspond to the Commission’s forecasts in autumn

1999.

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Thus, in terms of GDP/head, Ireland exceeded the Community average and the United Kingdom in 1997 and
Germany in 1999.

It should be noted that in Ireland the employment miracle occurred by maintaining the traditionally very strong
trend in the increase of productivity per person employed. The increase in employment results therefore from
acceleration of GDP growth beyond the trend in productivity.

Table 3

Productivity (% p.a.)

GDP (% p.a)

Employment (% p.a)

3,7 (2,0) (*)

3,8 (2,0) (*)

0,1 (0,0) (*)

3,1 (1,9) (*)

4,6 (2,4) (*)

1,5 (0,5) (*)

3,8 (1,5) (*)

8,0 (2,5) (*)

4,0 (1,0) (*)

1974-1985

1986-1995

1996-2001

(*) figures in brackets = EUR 15.

This distinguishes Ireland from other Member States (particularly ESP and NL), whose performance on employment
is good, but where this has mainly been achieved by slower growth in apparent productivity per employed worker.

3)

The foundations of Irish success were laid in the mid-1980s.

It was essentially the fear of an unsustainable growth in public debt and in the interest burden which caused

3.1.
a rethink and a policy of vigorous budgetary consolidation.

This policy was all the more necessary, given that a major part of the public debt was from overseas (in 1987: more
than 40 % of the debt).

Table 4

Public dept

Interest burden

Public deficit (-)

Public expenditure

Public revenue

(As % of GDP)

1970

1980

1985

1987

1990

1995

2000

2001

48,2

67,6

98,6

110,7

92,6

80,8

(39,3)

(32,8)

3,9

6,5

9,8

9,2

7,9

5,6

(2,3)

(2,1)

– 4,3

– 12,6

– 10,7

– 8,5

– 2,8

– 2,5

(+ 3,1)

(+ 3,2)

37,4

50,1

51,5

49,4

42,3

41,2

(33,2)

(32,6)

33,2

37,5

40,7

41,0

39,5

38,8

(36,3)

(35,8)

Budgetary consolidation was essentially effected by reining in public expenditure, which was reduced from more
than 50 % to some 30 % of GDP. This was made easier by a reduction in the interest burden as a result of falling
interest rates (EMU effect) and public debt. The latter was reduced from more than 110 % of GDP in 1987 to a
forecast level of less than 40 %! The public deficit (10,7 % of GDP in 1985!) has been turned into a surplus.
Simultaneously, the burden of tax and social security charges was reduced significantly in the course of the 1990s.

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3.2.
The reduction in taxation and the tax reform played a major part in the tripartite agreements between
government, trade unions and employers’ organisations. Since 1988 agreements have been concluded four times for
three-year periods; the fifth agreement has been negotiated and is in the process of adoption. With regard to wage
trends, these agreements have made possible a growth in wage costs per unit of production compatible with a low
rate of inflation and a substantial improvement in external cost competitiveness. Simultaneously the growth in real
wages was below the rate of productivity growth; that is to say that real wage costs per unit of production fell
significantly, which gave rise to a very favourable trend in the profitability of investment. Despite this prudent wage
development, real wages were able to rise significantly, which, together with an increase in employment, particularly
in the second half of the 1990s, paved the way for strong growth of private-sector consumption and domestic
demand.

Table 5

Nom. Wages
per capita
(% p.a.)

Productivity Wage costs
per unit of
production production (*)

Real wage
costs per
unit of

per empl.
Person
(% p.a.)

(% p.a.)

1974-1985

16,7

1986-1990

1991-1995

1996-2001

1999

2000

2001

5,7

4,3

5,4

6,0

6,4

6,6

3,7

3,5

2,6

3,8

3,4

3,6

3,2

12,5

2,1

1,7

1,5

2,5

2,7

3,3

Profitability in %
of capital stock

IRL

EUR 15

Real wages
per capita
(% p.a.)

Private cons.
In volume
(% p.a.)

6,8

8,9

9,7

14,0

14,6

14,7

14,5

5,6

6,8

7,1

8,3

8,3

8,5

8,7

2,6

2,3

1,7

2,2

2,9

3,2

3,6

2,2

3,4

3,1

7,2

7,7

6,9

6,3

(% p.a.)

− 0,2

– 1,1

– 1,1

– 2,3

– 1,3

– 1,4

– 0,6

(*) Difference in % between trend in real wage costs and productivity.

3.3.
Budgetary consolidation and moderate wage increases made it possible to fulfil the Maastricht criteria and to
relax monetary conditions. The convergence of interest rates towards the EMU level created conditions which were
particularly favourable for growth and employment in the second half of the 1990s.

Table 6

Wage costs per unit prod. Compared
with 22 industrialised countries 1987 = 100

Interest rate

in national currency

in USD (*)

long-term

short-term

1986-1990

1991-1995

1995-2000

1999

2000

(*) real exchange rate.

97,1

87,9

83,0

82,6

(83,5)

97,1

89,1

82,7

79,7

(80,1)

10,2

8,5

5,8

4,6

(5,8)

10,5

8,8

4,7

3,0

(3,5)

Following the progress in budgetary consolidation and the re-establishment of competitiveness and profitability to
which the wage development has strongly contributed, the relaxation of monetary policy permitted strong growth
without endangering price stability.

3.4.
Thanks to the favourable trend in competitiveness, growth was driven from the outset by exports. With the
reduction of free capacity and the appearance of very favourable monetary conditions in the second half of the
1990s, the high profitability of investment bore fruit: investment has become the true engine of growth (more than
13 % p.a. in 1996-2001).

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Table 7

Output gap Potential
(% p.a.)

Exports
(% p.a.)

Total invest.
(% p.a.)

Capital invest.
(% p.a.)

Public invest.
% GDP

1974-1985

1986-1990

1991-1995

1996-2001

1999

2000

2004

– 3,4

– 1,7

– 2,3

– 1,1

– 0,3

+ 0,3

+ 0,2

8,7

9,1

13,2

14,2

11,5

9,8

8,8

0,7

4,5

2,4

13,6

13,7

11,7

9,4

1,6

6,0

1,8

13,7

15,9

12,5

9,1

4,6

2,3

2,2

2,7

2,9

3,0

3,2

The share of gross capital formation has risen sharply from around 16 % of GDP in 1992/1993 to approx. 26 % of
GDP today. It was possible to finance this spectacular investment ratio increase without particular strain on the
current account balance or on long-term interest rates as a result of budgetary consolidation: public savings increased
from just under − 5 % of GDP in 1974-1985 to more than + 5 % of GDP at present.

This high investment ratio allows a substantial increase in production potential so that the Irish economy can achieve
very high GDP growth rates without, to date, the emergence of major capacity constraints.

Table 8

Savings and investment in % of GDP

Private-sector
savings

Public-sector
savings

National
savings

Current account
balance

Gross capital
formation

1974-1985

1986-1990

1991-1995

1996-2001

1999

2000

2001

22,9

19,7

19,2

20,4

20,3

21,0

21,4

– 4,6

– 3,6

– 0,6

+ 4,2

+ 4,9

+ 5,2

+ 5,6

18,4

16,7

18,5

24,6

25,1

26,3

27,0

– 7,9

– 1,0

+ 2,1

+ 1,6

+ 0,9

+ 0,4

(– 0,1)

26,3

17,7

16,4

23,0

24,2

25,9

27,1

3.5.
These macroeconomic components of the ‘Irish miracle’ were backed by an active structural policy. Here the
efforts to train the workforce deserve a particular mention in avoiding a situation where strong growth could have
been held back by bottlenecks on the labour market; this policy has found its true return since the Irish economy has
been creating jobs on a large scale. Reform of tax and of the social security system along with substantial
(re-)immigration have also boosted labour supply. The employment rate (% of the population of working age) has
risen to 61 % today, as against approx. 52 % in 1986-1990; however, it is probable that sizeable manpower reserves
can still be mobilised (the United States employment rate is around 75 %).

18.5.2000

EN

Official Journal of the European Communities

C 140/53

Attention should also be drawn to another component of structural policy: the Community Structural Funds. Rather
than making a net capital contribution to the Irish economy (the current account balance has generally been in
surplus), their action focuses on cofinancing structural policy measures in the spheres of regional development,
infrastructure and the labour market. Ireland typifies a country where use of the Structural Funds has made maximum
impact, particularly because such activities form part and parcel of a sound comprehensive policy particularly in the
macroeconomic field.

Lastly, the substantial tax and parafiscal revenue generated by growth in GDP and employment has been instrumental
in facilitating structural reforms in the tax and parafiscal sector.

4)
Thus economic policy in Ireland has achieved remarkable results. This policy fully reflects Community
recommendations and has even anticipated them. The policy was implemented against a background of social
consensus which was all the more remarkable in that the fruits of the effort launched during the second half of the
1980s only burst forth during the 1990s. The scope of this effort and its persisting constitutes ‘an example of good
practice’ of the first order in the Community.

Obviously, the question now is whether this positive development can continue.

In this respect, the following comments would appear important.

Although Ireland has caught up spectacularly, its growth potential remains considerable both in terms of labour
supply and of job-creating investment (capital widening), as well as in terms of productivity gains.

(i)

Ireland still has a significant labour reserve, not just thanks to the increase in the working-age population, but
also to the potential further increase in the employment ratio, which is compounded by returning emigrants, in
particular from the United Kingdom and the United States.

(ii) Returns on investment are excellent (exceeding the Community average by more than 70 %) and could improve
still further with the new tripartite agreement. At the same time, the outlook for demand — which depends on
endogenous factors — is good. Given these conditions, investment can create the output capacity and the jobs
necessary for growth to continue.

(iii) The already achieved investment rate (approximately 26 % of GDP) and the continuation of investment activity
make it possible to implement new technology in the production process on a large scale. Under these conditions,
it would seem plausible that the traditionally strong trend in productivity gains could continue.

The risks for the continuation of this growth process are in the possible appearance of bottlenecks in the labour
market, inadequate infrastructure, and of a return to inflationary slippage and overheating. These risks highlight the
need to boost structural policies, especially as regards the labour market, infrastructure development, environmental
protection and budgetary consolidation.

The question of whether the recent upswing in inflation constitutes inflationary slippage does, however, merit an
answer based on a detailed analysis.

Two factors appear important here:

(i) A country which is in the catching up phase scores — all things being equal — a higher rate of inflation than its
partners, as a result of relative price adjustment between sectors, and in particular of growth in the service sector.
This is a market mechanism which should be able to continue as long as the competitiveness of the country is
not affected.

(ii) With EMU, a relatively small and open country cannot develop an unlimited autonomous inflation. Cost slippage
impacts less on general prices and more on domestic profitability, external competitiveness and ultimately, on
the external balance and employment.

C 140/54

EN

Official Journal of the European Communities

18.5.2000

Table 9

1974-
1985

1986-
1990

1990-
1995

1996-
2001

1999

2000

2001

1) Prices GDP (% p.a.)

2) Private consumption prices (% p.a.)

12,8

13,8

3,2

3,2

2,8

2,6

3,9

2,9

3,9

3,0

4,2

3,1

3,9

2,9

3) Unit labour costs (% p.a.)

a) nom.

b) real

4) Competitiveness

1987 = 100

12,5

2,1

1,7

1,5

2,5

2,7

3,3

– 0,2

– 1,1

– 1,1

– 2,3

– 1,3

– 1,4

– 0,6

5) profitability in % of cap. Stock

6,8

8,9

9,7

93,9

97,1

89,1

82,7

14,0

79,7

14,6

(80,1)

—

14,7

14,5

6) Bal. Payments on curr. Account (% GDP)

– 7,3

– 0,9

+ 2,1

+ 1,4

+ 0,9

+ 0,4

– 0,1

7) Potential GDP gap in % GDP

– 3,4

– 1,7

– 2,3

– 1,1

– 0,3

+ 0,3

+ 0,2

Table 9 shows that Ireland is not suffering from a profit squeeze and that the competitiveness and profitability of the
economy remain excellent. However, the reduction in the GDP-gap and in the surplus of the balance of payments on
current account show that capacity tensions could develop. The continuation of budgetary consolidation, as
recommended by the Community, therefore appears appropriate in the current situation.